Non-Qualified Stock Option (NSO)

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What is a non-qualifying stock option (ONS)?

A non-qualifying stock option (ONS) is a type of employee stock option in which you pay ordinary income tax on the difference between the award price and the price at which you exercise the option.TheThe

Key points to remember

  • Ineligible stock options require payment of income tax from the grant price less the price of the option exercised.
  • NSOs could be provided as another form of compensation.
  • Prices are often similar to the market value of the shares.

Allocation of Ineligible Stock Options (NSO)

NSOs are simpler and more common than incentive stock options (ISOs). They are called unqualified stock options because they do not meet all of the requirements of the Internal Revenue Code to be ISO qualified.

How unqualified inventory is used

Unqualified stock options give employees the right, within a specified period, to purchase a specified number of shares in their company at a pre-determined price. It can be offered as another form of workers’ compensation and also as a way to encourage their loyalty to the company.TheThe

Important

Ineligible stock options often reduce the cash compensation that employees earn from their jobs.

The price of these stock options is generally the same as the market value of the shares when the company makes these options available, also known as the date of grant. Employees will have a time limit to exercise these options, known as an expiration date. If the date passes without the options being exercised, the employee will lose those options.

The company’s share price is expected to increase over time. This means that employees can potentially acquire shares at a reduced price if the award price – also known as the strike price – is lower than subsequent market prices. However, the employee will pay income tax for the difference with a stock market price when the option is exercised. Once the options have been exercised, the employee can choose to sell the shares immediately or keep them.TheThe

Unqualified stock options (ONS) allow employees to buy shares of a company at a predefined price.

As with other types of stock options, unskilled stock options can be a way to reduce the cash compensation that companies pay directly to their employees while also tying some of their compensation to business growth. Option terms may require employees to wait a certain amount of time before the options vest. In addition, the employee could lose the options if he left the company before the stock options were acquired. There could also be recovery provisions that allow the business to recover the NSOs for various reasons. This may include the insolvency of the business or a takeover.

For smaller and younger businesses with limited resources, these options may be offered instead of salary increases. They can also be used as a recruiting tool to fill gaps in wages offered when hiring talent.

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